Starwood chooses Anbang’s deal; Marriott has next move
 
Starwood chooses Anbang’s deal; Marriott has next move
18 MARCH 2016 10:19 AM

Marriott International officials must decide how they want to move forward following Starwood Hotels & Resorts Worldwide’s announcement that it plans to pursue an all-cash offer from a consortium led by Anbang Insurance Group.

REPORT FROM THE U.S.—The long-anticipated marriage of Starwood Hotels & Resorts Worldwide and Marriott International could be in danger before the two companies even reach the altar.

Starwood announced in a news release early Friday that its plans to terminate the merger agreement with Marriott—which was set for a shareholders vote on 28 March—in favor of a $78-per-share cash offer from a consortium led by Anbang Insurance Group Company. Starwood officials said in the release that the Anbang offer is the “superior proposal” to Marriott’s stock offering, which is valued at $65.33 per share. With additional Interval Leisure Group shares, the total value of the Anbang offer carries a value of $83.67 per share.

The proposed Marriott/Starwood merger was first announced in November and was expected to close by mid-year 2016.

Wes Golladay, VP and equity research analyst at RBC Capital Markets, said Marriott will have a difficult time competing with the price tag of Anbang’s offer even considering the fact that a Marriott/Starwood merger would be simpler and offers long-term benefits.

“Marriott can come in lower because they offer less regulatory risk, and the deal could close sooner,” Golladay said. “Those two things could get you $4 or $5 lower than the (Anbang) offer. But does Marriott want to do that?”

Representatives of Starwood and Marriott did not respond to requests for further comment as of press time. Marriott officials said in a separately released statement that company officials would offer no further comment.

As of press time, Starwood’s stock jumped 4.7% to $79.97, while Marriott’s increased 2% to $73.26. The Baird/STR Hotel Stock Index, by comparison, is up 2.5% for the day.

What happens next?
Starwood officials said they have postponed a 28 March shareholders meeting originally scheduled to vote on the merger with Marriott, according to the company news release. In their statement, Marriott officials said they are “considering postponing” their shareholders meeting, which is scheduled for the same day.

Starwood officials did not provide a timetable for moving forward with the Anbang deal and when that might be closed.

Marriott isn’t necessarily out of the running. Both companies noted that Marriott has until 28 March to amend the existing merger agreement and sweeten the pot to compete with Anbang’s offer.

In a statement responding to Starwood’s decision, Marriott officials said they still believe their offer is better for Starwood in the long term.

“Marriott continues to believe that a combination of Marriott and Starwood is the best course for both companies and offers the best value to Starwood shareholders,” the statement said. “Marriott is in the process of reviewing the Anbang consortium’s proposal and is carefully considering its alternatives.”

In written guidance to investors, analysts with Barclays laid out several paths the deal could now take following Starwood’s decision. The options from Marriott’s perspective, according to that analysis, boil down to a decision to either walk away from the deal, return to Starwood with a higher bid or figure out a compromise bid with the Anbang consortium.

Walking away
Giving up on a deal with Starwood could be the most simple and straightforward path for Marriott, analysts said, especially because it means Starwood must pay Marriott a $400-million fee for terminating the merger agreement.

Barclays analysts Felicia Hendrix and Anthony Powell said this thinking fits with Marriott’s initial rationale for the merger.

“In our view, Marriott has made it clear since they originally announced they would acquire Starwood that this was an opportunistic transaction for them,” they wrote in their analysis.

Golladay agreed and said the Anbang offer shifts the numbers less in Marriott’s favor if it continues to pursue a merger.

“Hopefully their plan is to take the $400 million,” Golladay said.

C. Patrick Scholes, managing director of gaming and lodging and leisure equity research at SunTrust Robinson Humphrey, agreed that giving up on the Starwood merger is far from the end of the world for Marriott.

“Marriott is an excellent company with a lot of opportunities,” he said.

While Marriott would love to acquire Starwood at its original offering price, Scholes said he doesn’t see the company making a significant increase in a new offer. The industry is not at the beginning of its cycle, he said, and companies need to be careful not to overdo it. Marriott will have to stay disciplined and not overpay.

“Making an offering close to what Anbang is offering, it’s something I don’t see in the cards for Marriott,” Scholes said. “They may just have to move on.”

Raising the stakes
The Barclays analysts said Marriott’s counterproposal could be structured in different ways, depending if the company prioritizes the possible merger or its stock repurchase program, but that could ultimately lead to blowback from Marriott shareholders.

Analysts with Robert W. Baird & Company said that Marriott will come back with a better offer. But Starwood shareholders shouldn’t expect Marriott to get into much back and forth with Anbang, and Marriott isn’t likely to start throwing out the same numbers as Anbang.

“We believe Marriott’s revised bid for Starwood’s hotel business will have an implied valuation of less than ($78 per share),” they wrote in a statement. “We do not expect Marriott to engage in a protracted bidding war.”

Ultimately, Golladay said, the two companies were able to make different offers because they have “different motives.” Golladay noted it is important for the Marriott deal to be accretive in the second year.

“At the end of the day, Anbang is not underwriting the same return,” Golladay said.

Splitting up Starwood
The third path laid out by the Barclays analysts—for Anbang and Marriott to both have some ownership in Starwood—could seem the most far-fetched but also could make the most business sense.

“In a final scenario, Anbang and Marriott could negotiate to effectively split up Starwood, with Anbang acquiring the bulk of Starwood’s owned real estate while Marriott acquired the management and franchise fee business,” the analysts wrote.

This plan could meet the needs of all three companies.

“This ‘compromise’ could be the best-case scenario for all involved,” the analysts wrote. “Anbang could continue to add trophy hotel assets to its portfolio without the need to run a large lodging C-Corp business. Marriott and its shareholders would be able to add the Starwood portfolio to its system while also achieving cost synergies. Finally, Starwood shareholders could receive an increased cash component while also participating in the long-term growth of Marriott.”

HNN’s Bryan Wroten contributed to this report.

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